Explain the conditions of consumer's equilibrium under utility an… - Vidyadip

Question

Explain the conditions of consumer's equilibrium under utility analysis.

✓

Answer

Conditions of consumer's equilibrium using utility approach are as follows:

In case of a single commodity:

$\frac{\text{MU}_\text{X}}{\text{P}_\text{X}}=\text{MU}_\text{M}$
Or $\text{MU}_\text{X}=\text{P}_\text{X}$
$[\text{when }\text{MU}_\text{M}=1]$

In case of two commodities:

$\frac{\text{MU}_\text{X}}{\text{P}_\text{X}}=\frac{\text{MU}_\text{Y}}{\text{P}_\text{Y}}=\text{MU}_\text{M}$
Or $MU_X= MU_Y$_ [when $MU_M= 1$ and $P_X = P_Y = 1]$
Where,
$MU_X =$ Marginal Utility of commodity
$MU_Y =$ Marginal Utility of commodity Y
$P_X =$ Price of commodity X
$P_Y =$ Price of commodity Y
$MU_M =$ Marginal Utility of money
Assumptions:

Marginal Utility of money and price of commodities remain constant.
Law of Diminishing Marginal Utility must hold true, implying that Marginal Utility must decline as more of a commodity is consumed.

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